Nokia becomes riskier partner for Microsoft

Software giant’s mobile partner is sinking, posing a challenge

SAN FRANCISCO (MarketWatch) — Microsoft Corp.’s partnership with Nokia Corp. was seen as a bold but risky gamble in the software giant’s bid for a larger footprint in the fast-growing mobile market.

It’s turned out to be an even riskier endeavor after Nokia
NOK, +0.28%
issued another profit warning and unveiled a plan for drastic job cuts on Thursday.

Nokia Lumia 800 based on Windows Phone

The announcements sent shares of Nokia plummeting and highlighted doubts about Microsoft’s
MSFT, -0.38%
own mobile strategy.

That push relied heavily on an alliance with Nokia, which last year announced that it was embracing Microsoft’s Windows Phone as its main operating system.

That marriage produced Lumia, a Windows-based Nokia phone. It has won upbeat reviews, but remains an insignificant player in a market dominated by Apple Inc.’s
AAPL, -0.87%
iPhone and other devices based on Google Inc.’s
GOOG, -1.10%
Android operating system.

However, Nokia’s profit warning and plans for job cuts has further exposed a key weakness in Microsoft’s mobile game plan, analysts say.

Nokia got caught in a tough transition from its phones based on its Symbian operating system to Windows-based devices, according to IDC’s Kevin Restivo. “We see Windows phones getting traction in the market, but that transition has been more painful than Nokia anticipated,” he said.

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“It’s a body blow just as Microsoft is trying to burst out of the gate,” remarked analyst Roger Kay of Endpoint Technologies Associates.

That poses a serious dilemma for Microsoft, “Microsoft needs Nokia to stay afloat,” Restivo said. “It needs Nokia to gain incremental share in the smartphone field. ... Worst-case is if Nokia continues to bleed cash and market share. Microsoft can’t afford to have that happen.”

BGC Partners analyst Colin Gillis underscored this point, saying: “The real risk is Nokia disappearing. You don’t want that. ... Microsoft wants Nokia to succeed. Clearly, they are a major part of the phone strategy.”

But it was a flawed strategy, argued FBR analyst David Hilal, noting how Microsoft has simply fallen so far behind. “It’s a major uphill battle to take market share, no matter how good the reviews are on the Lumia,” he said in an interview.

There has been speculation that Microsoft might buy Nokia. But even with Nokia’s valuation taking a serious hit Thursday (the company’s U.S.-traded stock is now worth just a little more than $2 a share), many analysts don’t see the software company making such a move. Read the Tell post on loss of value at Nokia.

“Probably not,” Gillis said. “It’s like a pulling a Google. They don’t want to pull a Google.” He was referring to Google’s purchase of Motorola Mobility, which raised questions and concerns about the merger’s impact on Google’s financials.

Rob Enderle of the Enderle Group said a Microsoft-Nokia merger would probably turn into a “train wreck.” Canaccord Genuity analyst Mike Walkley observed that such a deal is “going to be a lot of distraction and hard work.”

Such an acquisition is “a low probability,” he added.

Some analysts do see Microsoft becoming a stronger mobile competitor through gains in emerging markets.

This notion was highlighted last week when IDC forecast that Windows could overtake Apple’s iOS in the smartphone market by 2016, mainly through gains in “key emerging markets.”

But the research group also said that this forecast assumes “Nokia’s foothold in emerging markets is maintained.”

Despite Nokia’s problems, analysts see the Microsoft sticking with its partner. “Both parties are going to see this through,” Restivo of IDC commented. “This is a painful transition that Nokia is going through right now.”

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